Mumbai: The Securities and Exchange Board of India (Sebi) may soon introduce exit norms for stock exchanges wanting to shut shop completely.
Some regional bourses are finding it difficult to stay afloat in the face of inadequate business and difficulties in complying with regulations, but cannot formally close down because there is no set of rules to deal with the assets and liabilities of a defunct stock exchange, said two persons with direct knowledge of the development.
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Both spoke on condition of anonymity as the market regulator hasn’t formally cleared the proposal.
The Securities Contracts (Regulation) Act, 1956, will have to be amended to introduce rules for complete derecognition of stock exchanges, both voluntary and involuntary.
“Some exchanges don’t have enough business to continue and comply with the existing regulations. They have sought voluntary derecognition from Sebi. They want to monetize the assets and distribute the proceeds among members, but cannot do this currently,” said one of the two persons.
“The funds and assets an exchange accumulates over the years come from the general public, largely for the development of marketplace and protection of investors of listed companies from future contingencies,” the person added.
The new rules will specify guidelines to deal with such issues.
Sebi has derecognized five of the 25 stock exchanges across India. Post-corporatization and demutualization of exchanges in 2004, several regional stock exchanges saw turnovers dwindling.
As the two main bourses, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), kept expanding their network across the country through franchises and brokers, firms preferred to be listed on these two, making regional stock markets unviable.
In 2006, a Sebi panel studied the future of regional exchanges after demutualization. The panel did recommend norms for exit of such exchanges and distribution of their assets and liabilities, but the proposals were not implemented.
At least 4,000 firms are listed only on the regional exchanges.
The recognitions of Coimbatore Stock Exchange, Hyderabad Stock Exchange, Magadh Stock Exchange, Mangalore Stock Exchange and Saurashtra Kutch Stock Exchange have been withdrawn for various reasons, but the fate of their members, listed firms and shareholders have been hanging fire because there are no closure norms.
Some other regional exchanges are also not seeking derecognition because of this.
The proposed exit norms will take care of these issues. The regional exchanges will be given an option to exit, and even after that they may choose an alternative trading platform.
The new norms will specify fair distribution of assets of a derecognized exchange among members and shareholders of listed companies.
The assets of a stock exchange include the contribution of the members, income of the exchange and the fiscal incentives that had helped the accumulation of reserves over the years of operation. Besides, the value of some assets appreciates over a period of time.
The net worth of a derecognized exchange after revaluation by an independent body could be distributed on the basis of these parameters. A part of the assets could go to the members and the remaining may be transferred to a fund earmarked for investor protection managed by Sebi or the government, said the first person cited earlier.
The listed firms may be allowed to migrate to any other exchange with minimum compliance procedures, said the second person.
The Hyderabad Stock Exchange was derecognized in August 2007 after it failed to dilute at least 51% of its equity share capital to the public other than shareholders with trading rights.
An official of the erstwhile Hyderabad Stock Exchange said: “We’ve complied with all requirements and have been waiting for Sebi’s response for the last three years. The property is huge but nothing can happen unless we get a clearance from Sebi.” The official spoke on condition of anonymity.
Ramswaroop Agarwal, director of the exchange, said the bourse did demutualize because there was no business. “We have done everything for compliance and still Sebi is not issuing the exit order.”
Fraught with litigation, the Coimbatore Stock Exchange has not renewed its recognition, which expired in September 2006.
D. Balasundaram, founder director and former president of Coimbatore Stock Exchange, said he is awaiting the Sebi guidelines on assets distribution.
“The exchange applied for cancellation of recognition in 2006, but Sebi had held that there was no provision in law for voluntary derecognition of stock exchanges,” he said.
Subsequently, Sebi appointed a three-member panel to manage the exchange. The directors of the exchange moved court and the case has not yet been settled.
The 2006 Sebi panel had pointed out that regional stock exchanges’ role has been continuously diminishing “in the wake of globalization”. It also found that these exchanges were facing difficulties as their “business had declined significantly as investors preferred to trade in BSE and NSE”.
“The listed companies felt that there was hardly any purpose in remaining listed” on the regional exchanges, it had said.
The government has attempted several initiatives to revive these exchanges in the past. It set up the Inter-connected Stock Exchange of India (ISE) to regroup the regional bourses and offer a third national marketplace.
ISE was promoted in 1998 by 14 regional exchanges as an additional trading platform to trade the shares listed on any of the 14 exchanges to boost the trading volumes. It was felt that trading across different stock exchanges would generate renewed trading interest among investors, but that did not happen.
ISE’s licence expires on 17 November.
“The average age of our members is 50 years and Sebi’s inaction is spoiling the lives of 299 members,” said Agarwal of the Hyderabad exchange.
According to him, each member has contributed Rs 7.5 lakh to run the business and the only hope for them now is to develop the property of the exchange and earn some rent to make a living.